The game's story centers on the wannabe pirateGuybrush Threepwood. After defeating ghost pirate LeChuck inThe Secret of Monkey Island, little is known of what happened between Guybrush Threepwood and Elaine Marley. The sequel involves Guybrush's attempts to both find the mysterious treasure, Big Whoop, and win back Elaine's love.

The game was also the first and only in the original series under the direction of LucasArts that never actually took place on Monkey Island. However, it is revealed in the following game, The Curse of Monkey Island, that the Carnival of the Damned seen in the LeChuck's Revenge's conclusion was actually part of Monkey Island.

Guybrush's story begins with him talking to two pirates and telling them about the time he defeated LeChuck.[2] He further tells them that he is looking for the treasure of "Big Whoop", and for a ship to take him there.[4] The pirates tell Guybrush that Largo LaGrande, LeChuck's ex-henchman, has placed an embargo on the island, and is not allowing any ships to enter or leave. Guybrush, with the voodoo-doll that Voodoo Lady gives him, defeats Largo. However, in trying to prove that he was the one who killed LeChuck, Guybrush makes the mistake of showing Largo that he has LeChuck's beard. Largo steals the beard and uses it to resurrect his old patron, this time as a zombie. The Voodoo Lady reveals to Guybrush that Big Whoop, the mythical treasure for which he is searching, is also the key to another dimension which will allow him to escape from LeChuck forever. In addition, she gives him a library book about Big Whoop which reveals that a map, made by the original discoverers of the treasure, still exists in four fragments.

After a lengthy quest involving library research, rigged gambling, theft, drinking contests, necromancy, monkeys and spitting, Guybrush is able to recover all four fragments of the map. He gives the map to Wally the cartographer so that it can be deciphered, but both Wally and the map are captured by LeChuck. Guybrush stows away in a crate of voodoo supplies which is delivered to LeChuck's fortress, and through yet more spitting and an accident involving a large quantity of explosives he and Wally are able to escape, although without recovering the map. Literally landing on Dinky Island, Guybrush encounters Herman Toothrot, who claims to be teaching zen philosophy on the beach. Herman is typically unhelpful, but his parrot remembers the conversation between the sailors who originally discovered Big Whoop and guides Guybrush to the treasure's burial site in exchange for crackers. Guybrush excavates the site using dynamite, and lowers himself into the hole on a rope. Elaine Marley, in her home on Booty Island, hears the explosion and correctly deduces that someone is attempting to dig up Big Whoop.

At this point, we return to the scene from the overture, of Elaine and Guybrush talking. Elaine agrees to help Guybrush if it will shut him up, remarking "That was the longest story I've ever heard!" Unfortunately for Guybrush, at this point his rope snaps and he falls into a series of artificial tunnels. LeChuck confronts Guybrush, claiming to be the mighty pirate's brother, and stalks him through the tunnels, tormenting him with a voodoo doll. Running from LeChuck, Guybrush makes a number of surprising discoveries, including the skeletal remains of his parents in a medical examination room (underneath a large sign reading LOST PARENTS, with an arrow), an elevator to Mêlée Island, and the infrastructure for an amusement park.

By taking advantage of his surroundings, Guybrush is able to construct a voodoo doll of LeChuck, and maims the zombie pirate. LeChuck begs Guybrush to take his mask off; Guybrush acquiesces, revealing the face of his brother, "Chuckie". The reunion of the two "brothers" is interrupted by a man in brown coveralls, not unlike the delivery crew in Acts II and III, telling them that kids are not allowed "down here." The two brothers, now both appearing as children, exit the tunnels together and meet their parents aboveground in the "Big Whoop" amusement park. As the family leaves to ride the Madly Rotating Buccaneer, Chuckie turns towards the screen and grins, voodoo magic playing over his eyes. The last in-game screen shows Elaine standing outside Big Whoop excavation site, wondering, "What could be keeping Guybrush? I hope LeChuck hasn't put some sort of SPELL over him .... "